MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4208.12.31of traded portfolios of financial instruments.This risk arises from market-making, dealing,and position-taking in interest rate, foreignexchange, equity and commodities markets.3. Interest rate risk is the current andprospective risk to earnings or capital arisingfrom movements in interest rates. Interestrate risk arises from differences between thetiming of rate changes and the timing of cashflows (repricing risk); from changing raterelationships among different yield curvesaffecting FI activities (basis risk); fromchanging rate relationships across thespectrum of maturities (yield curve risk); andfrom interest-related options embedded inFI products (options risk).4. Liquidity risk is the current andprospective risk to earnings or capital arisingfrom an FI’s inability to meet its obligationswhen they come due without incurringunacceptable losses. Liquidity risk includesthe inability to manage unplanneddecreases or changes in funding sources.Liquidity risk also arises from the failure torecognize or address changes in marketconditions that affect the ability to liquidateassets quickly and with minimal loss invalue.5. Operational risk is the current andprospective risk to earnings or capital arisingfrom fraud, error, and the inability to deliverproducts or services, maintain a competitiveposition, and manage information. Risk isinherent in efforts to gain strategicadvantage, and in the failure to keep pacewith changes in the financial servicesmarketplace. Operational risk is evident ineach product and service offered.Operational risk encompasses: productdevelopment and delivery, operationalprocessing, systems development,computing systems, complexity of productsand services, and the internal controlenvironment.6. Compliance risk is the current andprospective risk to earnings or capital arisingfrom violations of, or non-conformancewith, laws, rules, regulations, prescribedpractices, internal policies and procedures,or ethical standards. Compliance risk alsoarises in situations where the laws or rulesgoverning certain FI products or activitiesof the FI’s clients may be ambiguous oruntested. This risk exposes the FI to fines,payment of damages, and the voiding ofcontracts. Compliance risk can lead todiminished reputation, reduced franchisevalue, limited business opportunities,reduced expansion potential, and lack ofcontract enforceability.7. Strategic risk is the current andprospective impact on earnings or capitalarising from adverse business decisions,improper implementation of decisions, orlack of responsiveness to industry changes.This risk is a function of the compatibilityof an organization’s strategic goals, thebusiness strategies developed to achievethose goals, the resources deployed againstthese goals, and the quality ofimplementation. The resources needed tocarry out business strategies are bothtangible and intangible. They includecommunication channels, operatingsystems, delivery networks, and managerialcapacities and capabilities. The organization’sinternal characteristics must be evaluatedagainst the impact of economic,technological, competitive, regulatory, andother environmental changes.8. Reputation risk is the current andprospective impact on earnings or capitalarising from negative public opinion. Thisaffects the FI’s ability to establish newrelationships or services or continueservicing existing relationships. This riskmay expose the FI to litigation, financial loss,or a decline in its customer base. In extremecases, FIs that lose their reputation maysuffer a run on deposits. Reputation riskexposure is present throughout theorganization and requires the responsibilityto exercise an abundance of caution indealing with customers and the community.Q RegulationsAppendix Q-42 - Page 2Manual of Regulations for Non-Bank Financial Institutions